Inheritance Tax

Inheritance tax as we know it was introduced by the Conservatives in 1986 when it was set at a rate of 60%. However, two years later it was reduced to 40%. The tax was intended to hit only the very wealthy, and until recently, only a small percentage of estates had any inheritance tax liability.

With house prices having spiralled upwards, more and more middle-class families have found themselves dragged into the inheritance tax net. The level at which inheritance tax becomes payable – known as the nil rate band or inheritance tax threshold – has risen steadily over the years but has stood at £325,000 perperson since April 2009, so £650,000 for a married couple.

Inheritance tax is usually paid on an estate when someone dies. It’s also sometimes payable on trusts or gifts made during someone’s lifetime.


Inheritance tax exemptions

Potentially exempt transfers (PETs)

Most gifts to other people are classified as ‘potentially exempt transfers’ or PETs.If you survive for seven years after giving the gift, no inheritance tax is due at all. However, if you die within this period and the gift valued at less than the inheritance tax threshold, it will be added to the value of your estate.

If it’s valued at more than the threshold, the person receiving the gift will have to pay inheritance tax. But there’s a further complication because if you die between three and seven years after making the gift and the value of the gift is more than the threshold, the tax payable will be reduced by taper relief.

Other exemptions include:

Annual exemption

Each year you can gift away up to £3,000, either as a single gift or as several gifts adding up to that amount. You can also use your unused allowance from the previous year.

Small gifts

You can make small gifts of up to £250 to as many people as you like, as long as you have not used another exemption on the same person. This can’t be combined with the £3,000 above.

Wedding gifts

Gifts for weddings or civil partnerships are also exempt up to a point. Up to £5,000can be gifted for a child, up to £2,500 for a grandchild or great-grandchild, and £1,000 from anyone else.

Regular gifts

Any regular gifts you make out of your after-tax income are also exempt from inheritance tax. However, these gifts will only be exempt from tax if you have enough income left over after making the gifts to maintain your healthy lifestyle.

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